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					Advanced Issues In Multiple Award
Schedule Contracting

Breakout Session # 905
Jonathan S. Aronie, Esq.
Sheppard Mullin Richter & Hampton LLP


April 24, 2007
1:40 – 2:40 pm



                                        2
The Audit Alphabet Soup

•   GSA
•   GSA OIG (auditors)
•   GSA OIG (agents)
•   SBA
•   IOA
•   DOL OFCCP
•   GAO
•   DCAA
•   Agency inspections

• And whistleblowers


                          3
Parade of Horribles . . .

• Breach of contract
• Price adjustments (retroactive)
• Price reductions (prospective)
• Cancellation/Termination
• Civil False Claims Act
   – DOJ initiated
   – Relator initiated
• Suspension/Debarment
• Collateral suspension/debarment
• Criminal prosecution
                                    4
Civil False Claims Act

• Civil War era anti-fraud statute
• Currently Government‟s primary civil fraud
  statute
• “Qui Tam” provisions permit suits to be
  brought by “relators” on behalf of Government
• Relators can be part of the alleged fraud
• Significant damages / penalties


                                                  5
Elements Of An FCA Action
• A false claim
• Submitted to the U.S. Government
• “Knowingly”
  – Actual knowledge
  – With deliberate indifference
  – Recklessly
• Slightly different for a “Reverse False Claim”

                                                   6
Damages / Penalties
• Treble damages
   – $1M actual damages costs you $3M in damages
• Up to $11,000 Penalties per violation
   – $1 overcharge on 100 invoices costs $300 in
     damages, plus $1,100,000 in penalties
• Plus Plaintiff‟s attorneys fees in some cases
• Plus your own attorneys fees
• Plus collateral damages

                                                   7
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                                                                           Illustrative MAS FCA Settlements




8
“Every indication we have, including hotline
calls and qui tam actions filed under the civil
False Claims Act, is that defective pricing is
currently alive and well at GSA, although
the contractual right to audit for it is not.”

                      -Kathleen S. Tighe


                                                  9
High Risk Areas




                       10

                  10   10
Contractor Team Arrangements




                                    11

                               11   11
Contractor Team Arrangements

•   MAS contractors can team
•   Facilitates award of large, complex tasks
•   Facilitates small business participation
•   CTAs vs. subcontracts
•   Key compliance considerations
    –   All members must be MAS contractors
    –   Each member must sell at its own Schedule price
    –   Each member must pay its own IFF
    –   GSA now permits single POC for invoicing/billing


                                                           12
GSA’s Suggested Elements Of A Quality
CTA
•   Identify participants, responsibilities, schedules, items
•   Define key terms
•   Identify scope, performance period, termination provisions
•   Identify fees, etc.
•   Identify administration functions and process
•   Establish license and other proprietary rights
•   Establish representations and warranties
•   Identify confidentiality provisions
•   Identify indemnification provisions
•   Identify governing law
•   Establish how disputes will be resolved


                                                                 13
Price Reductions Clause




                               14

                          14   14
Overview

• Contractor provides data to GSA prior to
  negotiations (“CSPF”)
  – Discloses standard commercial practices
• Data reveal customers that receive
  company‟s best discounts (“MFC”)
• Company negotiates “Basis of Award”
  category of customers and BOA/GSA
  relationship

                                              15
The Price Reductions Clause

• The Price Reductions Clause serves to maintain the
  relationship between three prices:

   – The GSA price

   – The BOA price

   – The commercial list price

• Changes to the relationship subsequent to award
  trigger the Clause


                                                       16
Computing a Price Reduction

            Disclosed   Ratio     New
            Discount            Discount

 Basis of
  Award      3%          1      4%
Customer


  GSA
             6%          2        ?


                                           17
Computing a Price Reduction

            Disclosed   Ratio     New
            Discount            Discount

 Basis of
  Award      3%          1      4%
Customer


  GSA
             6%          2      8%


                                           18
Computing a Price Reduction

             Disclosed   Ratio     New         %       Ratio
             Discount            Discount   Increase

  Basis of
   Award      3%          1      4% 33%                 1
 Customer


   GSA
              6%          2      8% 33%                 2


                                                               19
What Does NOT Trigger the Clause?

• Sales to Federal agencies/Authorized Purchasers
• Sales outside the basis of award (if within disclosed
  commercial practices)
• Sales of products/services not on Schedule
• Certain fixed price, high dollar value orders
• Certain “spot discounts” provided equally to the
  Government
• Quotation or billing errors, properly reported to GSA
• Other disclosed and pre-approved sales


                                                          20
Scope of Contract Issues




                                21

                           21   21
Scope Of Contract Issues

• Two key questions
   – Is the product/service within the scope of your Schedule?
   – Is the product/service on your Schedule?
• Terminology
   –   “On Schedule” or “Schedule Item”
   –   “Non-Schedule” or “Non-FSS”
   –   “ODC”
   –   “Ancillary Item” or “Incidental Item”
   –   “Open Market”
• GSA‟s ongoing investigative focus in this area
• Bid protests


                                                                 22
Trade Agreements Act




                            23

                       23   23
TAA Overview

• All Schedule products and services must
  comply with the Trade Agreements Act (TAA)
  – Products must be “substantially transformed” in an
    eligible country
  – Services must be performed by a company
    “established” in an eligible country
• Schedule contractors must take TAA
  compliance seriously


                                                         24
Summary of Eligible Countries

• United States
• Caribbean Basin Countries
• Free Trade Agreement Countries
• Least Developed Countries
• WTO Government Procurement Agreement
  Countries


        See FAR Part 25 for a current list of eligible countries.



                                                                    25
Partial List of Ineligible Countries

• Taiwan
• Malaysia
• China
• South Africa


• General rule: If it‟s not expressly eligible, it‟s
  ineligible.
                                                       26
Substantial Transformation Guidelines

•   Origin of components is generally (but not always) irrelevant where
    there has been a substantial transformation.
•   Assembly operations that are minimal or simple generally will not result
    in a substantial transformation.
•   Components packed together as a set are not necessarily substantially
    transformed by virtue of being so packed.
•   Products sold as “optional” configurations still may meet TAA
    requirements
•   “Substantial transformation” requires something more than mere
    assembly.
•   The TAA substantial transformation test is somewhat different from the
    NAFTA test.

                                                                               27
    Illustrative Questions
•   Does the name of the end product differ from the names of its components?
    (e.g., computer vs. display, disk drive, keyboard, etc.)
•   Do the physical characteristics and qualities of the end product differ from
    those of its components (e.g. size, weight, shape, strength, hardness, etc.)?
•   Is the end product used for a different purpose than its components?
•   What level of complexity is involved in assembly?
     – How many components are there?
     – What technologies are involved?
     – How many operations are required?
     – What machinery or tooling is used?
     – How long does the process take?
•   What types of technical skills must employees possess?
•   What is the expense and value added of assembly?



                                                                                    28
Audits




              29

         29   29
The Inspector General Act

• Per the Inspector General Act of 1978, as
  amended, the Inspector General's mission is
  to:
  –   Conduct independent audits and investigations
  –   Prevent and identify waste, fraud, and abuse
  –   Promote economy, effectiveness, and efficiency
  –   Review pending legislation and regulation



                                                       30
The Origins Of An OIG Audit

•   Renewal (Pre-Award Attestation Review)
•   Contracting Officer referral
•   IOA referral
•   Whistleblower allegation
•   Competitor complaint
•   Targeted OIG enforcement effort (e.g., TAA)
•   DOJ investigation
•   Voluntary disclosure
•   Significant Schedule revenue growth
•   Historic risk factors
•   It‟s just your time


                                                  31
GSA OIG
• Statistics: Oct. - March „06
  – 48 pre-award audits on contracts worth $3.8 billion
  – Made more than $240 million in financial
    recommendations
  – 991 Hotline calls
  – 372 referrals for criminal prosecution, civil
    litigation, and administrative action
     • 61 criminal cases; 9 civil cases; 66 administrative cases
     • 7 of the 9 civil cases were accepted for litigation by DOJ
  – More than $46 million in recoveries

                                                                    32
VA OIG
• Statistics: Oct. - March „06
  – 13 pre-award reviews identified $69.8M in
    potential cost savings from Schedule
    vendors based upon “most favored” pricing
    concept
  – 515 investigations; 835 arrests
  – $176 million in monetary recoveries
     • Office of contract review recovered more than
       $17.5 million)

                                                       33
Current Audit Issues

•   “Commercial pricelist”
•   “Commercial sales”
•   Resumes
•   Mapping
    – Commercial to federal
    – Subcontractor to prime
• Profit
                               34
35
Basic Rules For An OIG Audit
•   Call and involve your lawyer
•   Review document request carefully
•   Identify exclusive point of contact
•   Establish exclusive line of communication with auditor
•   Negotiate reasonable scope of document request
•   Don‟t obstruct audit
•   Conduct privileged parallel review
•   Request and plan for entrance conference
•   Provide support to auditors throughout audit
•   Review all documents to be produced for privilege
•   Request and plan for exit conference

                                                             36
The Entrance Conference

• Introduce key points of contact and selected key personnel
• Discuss origin, scope, & duration of audit
• Discuss logistics
    – Hours of operation
    – Designated auditor work area
    – Badge and escort requirements
• Discuss production/interview rules
    – Document production/copying
    – Employee interaction (maybe/maybe not)
• Request review of draft report and exit conference

                                                               37
The Exit Conference
• Ensure company cooperated
• Discuss substantive audit findings
• Ensure auditors have all requested documents
   – If not, agree upon time line to provide documents, if
     appropriate
• Agree upon any outstanding action items and time
  line to complete
• Discuss auditors‟ next steps and timing
• Renew request to review draft report
• Incorporate any new information into ongoing parallel
  privileged review

                                                             38
Why Do Bad Things Happen To
Good People?




                                   39

                              39   39
A few recurring scenarios…

• Failure to understand Government Contracts environment
• Sales growth outpaces infrastructure growth
• Management focuses on revenue, without focusing on
  compliance
• Individuals “on the ground” not incentivized to “do the right thing”
• Decentralized operations without centralized control
• Lack of training




                                                                         40
How Can “Bad Things” Be
Prevented?

The Importance of a Comprehensive
Internal Compliance Program




                                         41

                                    41   41
Ten Simply Ways to Reduce Risk
•   Submit only current, accurate, and complete information to Government
•   Memorialize all Government advice and direction in writing, and log all
    communications with the Government
•   Use email judiciously
•   Don‟t give gifts to or engage in employment discussions with Government
    employees
•   Review solicitations, contracts, and subcontracts carefully, and take exceptions
    where necessary
•   Limit who can interact with the Government
•   Provide avenue for internal reporting of problems
•   Ensure Sales has a financial incentive to “get it right”
•   Maintain complete, up-to-date records of all proposals, contracts, and
    modifications
•   Develop a tailored internal compliance program


                                                                                       42
A Tailored Compliance Program
• Senior officer must be assigned overall responsibility
• Program must be tailored to organization
• Program must incorporate Code of Conduct
• Personnel must have access to hotline
• Personnel must receive training
• Compliance must be key to advancement
• Program must be monitored and audited
• Breach of program must result in discipline
• Program must be reviewed and updated regularly

                                                           43
Questions?




                  44

             44   44
A brief, shameless plug for the Second Edition of Multiple
Award Schedule Contracting, by John Chierichella and
Jonathan Aronie
                  – Only comprehensive guide to
                    the MAS program
                  – Useful Vendor Resource Guide
                  – Nationally recognized
                    contributors
                      • Ernst & Young
                      • Coalition for Government
                        Procurement
                      • Government Officials
                  – Hardcover or paperback
                  – Available at
                    www.schedulecontracts.com
                    and

                                                             45
                Jonathan S. Aronie, Esq.
                     Sheppard Mullin Richter & Hampton LLP
                               Washington, DC

                              202.218.0039 phone
                                202.302.4855 cell
                                202.312.9416 fax
                          jaronie@sheppardmullin.com

Jonathan‟s professional experience includes litigating under the qui tam
provisions of the False Claims Act, drafting corporate compliance plans,
conducting internal investigations (proactive and defensive), and
counseling corporate clients in an array of federal regulatory and statutory
matters. He frequently meets with, negotiates against, and represents
clients before the Department of Justice, the Government Accountability
Office, the General Services Administration, and the various agencies of
the Department of Defense. Jonathan writes a monthly procurement
column for Federal Computer Week and is the co-author of the leading
book on the Multiple Award Schedule Program. He is cleared at the highest
levels and frequently counsels clients in classified matters relating to
national security.

                                                                           46

				
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